Tax Planning

Introduction

Reactive Tax Filing v. Proactive Tax Mitigation

Many physicians equate taxes with filing a return once a year. But taxes are a critical piece of your overall financial picture. Planning for taxes is a crucial part of a broader, comprehensive financial plan that helps you safeguard and grow your wealth.

Thinking about taxes only leading up to tax deadlines leaves untapped opportunities for long-term savings and financial growth. That’s why we prefer a proactive approach to strategically minimize your tax liabilities throughout the year—not just when the filing deadlines loom. Comprehensive financial planning looks beyond basic deductions and credits to advanced strategies like retirement planning, asset location optimization, and charitable giving plans to reduce taxable income and maximize wealth.

The reality is that without consistent attention to your tax situation, you may be paying more than you need to. Worse yet, you could miss out on growth opportunities that allow you to reach financial independence years or even decades earlier.

As our managing directors typically tell clients, “A dollar saved in taxes is as good as a dollar earned.” So, do you feel confident your current tax strategy is preserving the income you’ve worked so hard to generate? If not, it’s time to consider how tax strategy as part of a well-rounded financial roadmap can reduce your taxable income and help secure your financial future.

Pain Points

Tax Challenges of High-Earners

High-earners face unique tax exposure challenges that impact their ability to build wealth:

  • Income is taxed at a higher tax bracket. High earnings from a career or business and the potential for additional earnings from investments push them into higher tax brackets.
  • The tax code limits the ability to take many tax deductions and credits based on modified adjusted gross income (MAGI), limiting the availability of many common tax breaks.
  • High earners often face additional taxes that don’t impact lower- and middle-income taxpayers, like the Additional Medicare Tax, the Net Investment Income Tax (NIIT), and the Alternative Minimum Tax (AMT).

Additional complexity requires a proactive and tailored tax strategy to minimize exposure and avoid overpaying on taxes year after year.

The problem is that many high-income taxpayers don’t enlist the help of a CFP®-led advisory team who engages them in proper tax strategy. As a result, they lose a significant portion of their earnings to taxes, diminishing their ability to invest in future growth and secure long-term financial stability.

Tax Preparation vs. Tax Planning vs. Tax Mitigation

Mergers and Acquisitions
1.

Basic tax preparation

Most people are familiar with this level of service: meeting with a tax preparer once a year to file your return. While necessary, this reactive approach only allows you to take advantage of deductions and credits that happen to be available based on what did or didn’t happen over the past year. It’s about compliance rather than opportunity, and you miss out on proactive strategies you could have implemented throughout the year to reduce your tax burden.

2.

Quarterly tax planning

Taking it a step further, some advisors meet with clients quarterly. This method is a more informed approach to tax planning because it considers your year-to-date earnings and upcoming financial events. However, it still tends to be backward-facing—focused more on responding to what has already happened and making adjustments as you move forward rather than planning for long-term savings.

3.

Advanced tax mitigation

The highest level of service goes beyond simple tax planning, integrating proactive tax strategy as part of a comprehensive wealth management strategy. This approach looks at your entire financial picture, incorporating estate planning, business succession, retirement savings, and investment strategies to reduce your tax liabilities and preserve wealth over the long term. Some of these strategies provide immediate benefits, while others are designed to pay off in the future, even benefiting your heirs down the line.

For physicians and medical specialists with high-income potential and complex financial situations, a one-size-fits-all approach to won’t deliver the results you’re looking for. You need a level of service that matches your unique needs and goals.

Working with a CFP®-led advisory team who takes a holistic and proactive approach can create new savings opportunities rather than simply reacting to what has already occurred.

Lifecycle Stages
What does tax mitigation entail?

Financial success doesn’t just happen. It requires strategies customized to each lifecycle stage of your financial life:

  1. Accumulation: This phase starts when you complete residency and fellowship and become an attending. During this phase, your focus is on your earnings, developing a saving habit, and determining the types of debt to take on now that will benefit you in the future.
  2. Conservation: Once you’ve established your career, you’re in your key savings years. However, this is also a costly stage, as you might raise a family while paying for short, mid-term expenses and / or lifestyle ones. Effective tax planning can keep you on the right path to meet your wealth-building goals.
  3. Decumulation/Distribution. In this phase, you near and enter retirement and start living on the wealth you built during your working years. To preserve your assets, you need to couple tax mitigation with a distribution plan.
Tax Planning Strategies for Effective Mitigation
Legal Malpractice
1.

Maximizing tax-deferred strategies

Contributing to tax-advantaged accounts is one of the most straightforward ways to reduce taxable income. Contributions to retirement accounts may be tax-deductible, meaning you pay less in taxes today while also securing your future.

Tax-advantaged accounts include:

  • 401(k)s, 403(b), or 457(b) retirement accounts
  • Traditional and Roth IRAs
  • SEP-IRA or defined benefit retirement plans for self-employed people
  • Health savings accounts (HSAs) to save for future healthcare expenses
  • 529 plans to save for higher education
2.

Capital gains management

For taxable investments, an appreciating portfolio can be a mixed blessing. While the goal is to build wealth through long-term appreciation, taxes can eat away at investment returns.

Managing the timing of when you sell investments can help you minimize your overall tax liability and maximize after-tax wealth.

The tax rate on long-term capital gains—profits from selling investments held for more than one year—is typically lower than that for short-term capital gains or ordinary income. By holding investments for the long term, you can reduce the taxes you owe when you sell.

Another option for reducing the tax burden of investments is to take advantage of tax loss harvesting. This strategy involves selling assets that have decreased in value to offset capital gains from other investments. You can use any losses exceeding your capital gains to offset ordinary income, up to $3,000 each year, and carry unused losses to future tax years.

It’s essential to remember the wash sale rule when taking advantage of tax loss harvesting. The wash sale rule prohibits taxpayers from claiming a loss on the sale of an investment if they purchase the same or a “substantially identical” investment within 30 days before and after the sale date.

Avoiding wash sales rules is can be complex and challenging if you subscribe to DIY finance if you have multiple accounts with different financial institutions.

3.

Estate tax mitigation

For high earners with significant assets, estate tax mitigation is essential to long-term financial planning. Without careful estate planning, a substantial portion of your wealth could be subject to estate taxes, potentially reducing the legacy you intend to leave behind for your loved ones.

One way to reduce your estate tax exposure is by utilizing the annual gift tax exclusion. Currently, the tax code allows you to give up to the annual gift tax exclusion limit per recipient each year without incurring any gift tax. Gifting allows you to gradually reduce the size of your taxable estate while enriching your heirs or beneficiaries during your lifetime.

Gifting more than the annual exclusion amount triggers a gift tax return filing requirement, and you can either pay taxes on the gift or reduce your lifetime exemption amount.

Leveraging both the annual gift tax exclusion and the lifetime exemption amount allows you to transfer a significant amount of wealth tax-free throughout your life or at the time of death.

Charitable giving is another estate tax mitigation strategy that provides tax benefits while supporting causes that matter to you. There are multiple ways to structure charitable donations for tax efficiency:

  • Qualified Charitable Distributions (QCDs). You can make a tax-free distribution from your IRA directly to a charity if you are over 70½. These QCDs satisfy your RMD while avoiding taxes on the withdrawal.
  • Donor-Advised Funds (DAFs). A DAF allows you to contribute cash, securities, or other assets to a fund at a public charity, such as a Community Bank. You receive an immediate tax deduction, and the funds are invested for tax-free growth. You can donate funds to charities over time by recommending grants to any eligible public charity. This strategy provides flexibility and maximizes tax benefits in high-income years while maintaining control over when and where the funds are donated.
4.

The 'Always-On' Tax Mitigation Strategy

An “always on” tax mitigation strategy is about more than just filing your taxes each year—it’s a proactive, year-round approach to managing your tax liabilities. When you work with a CFP®-led advisory team who continually reviews and adjusts your tax strategy, you identify new opportunities for savings as they arise. This approach helps high earners stay ahead of changes in tax laws and market fluctuations.

Whether you’re looking to build wealth, save for retirement, or pass on your assets to the next generation, an always-on tax mitigation strategy ensures your financial plan remains agile and responsive to your needs and the ever-changing tax landscape.

Takeaways
Secure Your Financial Future with "Always On" Tax Planning for Specialists

Tax savings are not something you should discuss with your tax advisor once a year. Taking an “always on” approach to reduce your tax bill can lower your taxable income, protect your wealth, and lay the foundation for a more secure financial future.

Whether you want to maximize deductions, set your children and grandchildren up for success, or minimize your estate tax burden, the tax code offers several options for keeping more of your income while meeting those goals.

However, tax advice is never one-size-fits-all. That’s why it’s crucial to work with an advisor who understands how to tailor tax mitigation strategies to your unique needs. The goal isn’t a one-time write-off but a seamless, integrated strategy that covers all aspects of your financial life—from reducing your tax liability today to securing your wealth for the next generation.